The binky remains hidden

"The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook."

With that sentence, the FOMC gave a nod to the goings on in the world economy and in markets, and gave themselves a perfect ex post rationale for whatever decision they arrive at on the 16th of March.  To be sure, the language describing the US economy was softer, though it would hardly be credible if it weren't.

Given the length of the statement, however, the failure to acknowledge the committee's current assessment of the balance of risks was telling; as for the end of the sentence quoted above, it certainly sounds like the FOMC is delegating responsibility to the marketplace.  One might credibly question the wisdom of such a decision; the market's propensity to throw its toys out of the pram when the Fed thought about removing its binky from 2010-2013 was one of the reasons policy was as (over-) accommodative as it was for so long, allowing capital to be mis-allocated and stupid decisions to be made.

Evidently, however, equity markets were sad that the FOMC didn't explicitly acknowledge that global volatility might restrain growth and dampen inflation.   In a way, they have a point; the best available evidence is that the follow-through from the August-October circus was in fact weaker Q4 growth and lower inflation in many parts of the world.  The irony, of course, is that the FOMC did explicitly forecast that outcome in September:

"Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the medium term."

So perhaps it was the Fed's failure to immediately re-introduce the monetary binky that sent equities lower; well, either that, or the worry that higher oil prices might squeeze an already badly-stretched consumer.  (Yes, that is a joke.)  In a way, it was refreshing to see the iron-clad correlation between oil and the equity market sunder; that's what disappointing earnings from a couple of big boys amd the aforementioned toy throwing will do for ya.  (Incidentally, Samsung also reported weak earnings last night, so it appears that the sales weakness extends to all shiny toys, not just Apple's.)

That oil managed to rally in the face of another appalling set of inventory numbers was telling; indeed, just looking at the chart from the point when the DOE data was released (see arrow below), you might have thought there was a tasty draw rather than another big build.  While some of the recent resilience has clearly been a function of rumoured OPEC cuts, the price action is nonetheless impressive.  If it does pop another few bucks or so, that will surely have at least some positive impact upon high yield, and thus upon risk assets generally.


As for fixed income, front ends closed flat on the day but the intraday price action told a very different story indeed.   It was curious to see yields grind higher even with US equities slightly in the red; at one point, the FFF7 contract that Macro Man suggested selling yesterday was 5 ticks to the good.  The cascade lower in Spooz put paid to that, but still, in the grand scheme of things a flat change on a day when the stock market drops more than a percent has got to be considered a result.


As for Spooz, Macro Man was shocked, SHOCKED to see that his flippant prediction of a 25 bp rally proved to be somewhat inaccurate.  So much for the omnipotence of the central banks in lifting asset prices.   However, as a public service for those looking for buyable dips when "the central banks are in", here is a chart of the cumulative hourly return of SPX futures over the last month.


Finally, given the newsflow from the Antipoides over the last couple of days, it's worth catching up on AUD/NZD.  On Tuesday evening NY time, the Australian Bureau of Statistics released into the wild a species endangered outside of a few exotic locales: higher than expected CPI .  Twenty-four hours later, the RBNZ gave the Fed a bit of a lesson in plain talking when it comes to policy bias:

"some further policy easing may be required"

As a result, rate differentials have moved in favour of the AUD, and it's now a couple of percent higher than where Macro Man highlighted it last month.   He still likes it for a move up to 1.12 or so, then re-assess.

In the meantime, it looks like the choppy seas aboard the S.S. Market will continue for a while longer.  Strap in and enjoy the ride!

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Eddie
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January 28, 2016 at 10:47 AM ×

Abee,

some more thoughts why it might not be nice and cosy out there… from an acknoledged bear.

Say you are a buy and hope investor and in the market for the long term (shocking, I know… nowadays the FMs of this world just buy the dips and make money hand over fist… but I digress). If you buy an S&P index tracker right now you will realise something around 2.5% annually over the next 10 years, including dividends. Not that much, agreed, but somehow ok in a ZIRP world. But you have this pesky volatlity over time that you (and your risk manager) need to digest.

If you bought the index tracker around 2000 your return would be closer to 0%, including dividends. Now, there might be some investors that need these returns (pension funds and friends) but I think they would run for cover once volatlity increases. So the market may stay calm for a long time and all of a sudden go down through the elevator shaft. This has nothing to do with fundamentals or the Fed, it is just about pricing and expected future profits (which have a nasty habit of mean reverting).

I made the same argument over there at Polemic's place, so nothing really knew.

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Booger
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January 28, 2016 at 11:25 AM ×

Comment from the last post regarding FX leading or not, from MM, LB, Abee:

I watch usd.cad, not because I trade it, but because it seems to lead the dollar index and even oil. No reason why it should really but it seems to have in the last 6 months. Probably won't persist. I am wondering if USD.CAD may well bottom around 1.40.

LB:
AUD.USD - With Marc Chandler's articles on FX, he is a great writer and I agree with most of his stuff, but not so much on H-S on AUD.USD currently. I am looking to short rather than go long from this level. Freakishly better than expected set of fundamental Aussie data releases in the last 2 months, including this week's inflation number may well resolve to be disappointing in the next few months. Plus it hasn't really developed enough of short interest or overdone move like USD.CAD at 1.46 to justify going countertrend for the risk.

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Anonymous
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January 28, 2016 at 2:12 PM ×

So equities sell off on bad EU bank news, then poor US data (Dur Goods). Immediately the US exchanges announce that they have "data issues" with APPL (to stop it falling), and after that Oil pops +100 points as OPEC etc suddenly announce production cuts. Equities rally 100+ points. All of today's falls in US equities are erased in 15 mins.

Of course the exchanges never break on upside moves. And people wonder why the public thinks financial markets are manipulated... lol.

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Anonymous
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January 28, 2016 at 2:30 PM ×

So stocks cannot catch up with oil today?

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Macro Man
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January 28, 2016 at 2:31 PM ×

I do have to laugh. The Fed pausing from a tightening is bad for stocks, but the prospect of higher oil prices is good for stocks. Imagine if you'd read that ten years ago....

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Anonymous
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January 28, 2016 at 2:33 PM ×

Make the above up 200+ points... no wait, don't... Russia is now saying that maybe there won't be production cuts after all... or maybe there will... equities up 200... now down 80...now not knowing wtf to do...

The Fed needs to effect an immediate rate rise of 10% - just because they can - I mean think of how much "room for maneuver" it would give them if we do have a recession in the near future? I'm gonna ring Janet now and suggest it.

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Anonymous
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January 28, 2016 at 2:38 PM ×

JPM: Q4 US GDP tracking 0%

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washedup
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January 28, 2016 at 2:50 PM ×

@MM - thats what happens when oil becomes a bigger component of people's investment portfolios than of their consumption baskets!

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macrogoldman
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January 28, 2016 at 2:54 PM ×

let me make sure I got the 'good news' right today---opec cut reducing oil supply, bad durable goods meaning less fed hikes (well actually my English prof just said fewer--how few can there be zero is pretty few), and some IT issues keeping down stocks from trading down---forget buy the dips this is sell the rally time--or to paraphrase from reminiscences of a stock operator figure out if you are in a bear or bull market--and then trade accordingly and this sure looks like the start of a bear market

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washedup
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January 28, 2016 at 3:06 PM ×

wow macrogoldman - don't know if you are right or wrong but way to go on improving on MM's chosen moniker.
I am considering changing mine to Facewashedupbook

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Anonymous
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January 28, 2016 at 3:12 PM ×

DB: next Lehman? Bear Stearns?

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Anonymous
admin
January 28, 2016 at 3:14 PM ×

DB ..... $140 to $17+ since $2007 .... below 2008-2009 crisis levels ...5th largest bank in world. The blowup will be epic.

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Anonymous
admin
January 28, 2016 at 3:30 PM ×

Watching $DB as a sign of systemic problems lurking deep in the bowels of eurodollar/derivative portfolios a la 2008.

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hipper
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January 28, 2016 at 3:45 PM ×

The confusion is high but I believe that no Saudi or Russian cuts for that matter will materialize - yet. No way. It would be foolish because getting to this point, where basically 100% of North America is underwater for the long term excluding hedges and exhausting existing wells - has caused so much pain and tears. Giving up now would throw all that hard work and what it has achieved away. More likely that "leaking" faux news just to play with those word picking/counting algos. I think we could go down to tickle the previous bottom, which I think is close to "long term value territory" in terms of supply, since so much supply will be underwater.

I think CBs have become increasingly irrelevant, especially in terms whether they provide the binky again or not. It's now, I think, a more commonly believed theory that QE has not led to sustainable growth nor had any effect on inflation and as such the potential for additional Fed QE will be pointless other than for the financial market in the short term. I truly believe that that era is over and bad news will finally become bad and good becomes good. Now some pretty bad news rolling in and the industrial recession continues to go on.

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Anonymous
admin
January 28, 2016 at 3:48 PM ×

Hipper...this one's for you...MReits

https://www.dropbox.com/s/khoupp9iqovau6i/So%20here%20is%20what%20I%20think%20goes%20on%20in%20%20mortgage%20REITs.docx?dl=0


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Anonymous
admin
January 28, 2016 at 3:52 PM ×

OPEC: No plans for production cuts

http://seekingalpha.com/news/3061696-opec-plans-production-cuts

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Anonymous
admin
January 28, 2016 at 3:54 PM ×

"The STOXX Europe 600 Banks Index, grouping 46 lenders, dropped twice as
much as the region’s benchmark share index since late July. Banking stocks have fallen 14 percent in January alone, heading for their worst monthly performance since the depths of Europe’s sovereign-debt crisis in 2011. Deutsche Bank AG and Standard Chartered Plc are each down more than 40 percent since July."

http://www.bloomberg.com/news/articles/2016-01-27/europe-bank-rout-erases-434-billion-twice-greek-economy-chart

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Anonymous
admin
January 28, 2016 at 4:05 PM ×

Oil is not out of downtrend yet: a chart.

https://www.dailyfx.com/forex/technical/elliott_wave/gold/2016/01/26/eliottWaves_gold.html

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Compulsory Reading
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January 28, 2016 at 4:27 PM ×

http://www.mauldineconomics.com/the-10th-man/why-qe-was-the-worst-thing-in-the-world

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washedup
admin
January 28, 2016 at 4:30 PM ×

anon 3:48 - many thanks for that - very insightful.

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Leftback
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January 28, 2016 at 4:56 PM ×

Another point of view on the Fed, from a seasoned, intelligent and informed observer:

December Hike A Mistake - Blanchflower

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Eddie
admin
January 28, 2016 at 5:12 PM ×

A few more fun facts echoing hipper's comments.

During the last two bear markets the Fed eased to no avail. Low rates and stable or rising equity prices do not necesserily coincide.

Fed's Fisher kindly admitted that QE was all about front-loading an increase in asset prices. Wealth effect, etc., you know it. Now if equities are skyrocketing holding cash is incredibly painful. If you think more about the return of money than the return on money, though (to quote Leftback: you might outperform your benchmark this year by just holding cash) holding cash, even at 0%, becomes quite attractive.

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Macro Man
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January 28, 2016 at 5:15 PM ×

Oh, please. Blanchflower's another one trick pony, and a bit of a jerk to boot by all accounts.

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washedup
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January 28, 2016 at 5:22 PM ×

Left - I actually think the rate hike had a silver lining in that it has proved that the logistics of maintaining the new corridor (0.25-0.50 bps) can work, and all the fears of the system grinding to a halt because reverse repos were destined to not be able to create a floor - funny how no one has mentioned that in the last few weeks - but of course now we are on to other redoubtable challenges, such as the zika virus, and I do agree that it may be a long wait before the next hike.

As for fed credibility - I think the markets like certain outcomes from fed meetings and speeches more than others, but the problem is no one knows what the market will like, in advance - whether the folks creating the outcome are good ex-ante forecasters of the human condition may be less of an issue than people think. Its not like Bernanke had any credibility left after the sub-prime bust, but no one refused to buy stocks once he cranked up the press.

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abee crombie
admin
January 28, 2016 at 6:05 PM ×

Eddie, on equities. I am no perma bull, though I do have most of my savings in the market like most Joe Schmoes so color me biased

Conceptually you invest in equities bc there is a risk premium to be earned. Just like credit has a risk premium or duration, or under reaction to events, all trading and investing should be rooted in some kind of identifiable risk premium. I think we can all agree that there is a thing called equity risk premium and historically it has outperformed almost all asset classes.

As an investor its your job to monitor the risk premium. If it falls to low levels that dont compensate risk (ie valuations too high) then its your job to adjust your allocation. if you think you can predict economic/market cycles then, similarly you can do the same thing. But over the long term (10+) years, the equity risk premium is the highest source of returns. Now why do most investors not capture those returns, they over-trade, they invest in high valuation markets (dot com, Nikkei 90's etc) or concentrate in stocks/sectors/risk factors that they maybe dont understand.

So while everyone else is pulling out cash and getting ready for the bear if you are looking long term, I dont see what else you can do. Remember selling out is very easy, getting back in is the hard part. I'm just trying to manage how much cash I want to have for lower levels

DB is worrying. they are a sack of crap. I think they are in wind down mode but just dont want to spook the market and admit it. I dont know many ppl that work there but I've heard the morale is horrible.

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Anonymous
admin
January 28, 2016 at 7:14 PM ×

AC: Every move in the market is now a trap.

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hipper
admin
January 28, 2016 at 8:16 PM ×

Thanks Anon 3.48. Really helpful. CYS does look interesting as well especially in terms of their successful preparation to the possibly largest and currently likeliest threat of all, continuous flattening (read the SA article too).

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abee crombie
admin
January 28, 2016 at 8:25 PM ×

btw, sorry for sounding a little Jeremy Siegel there.

Not everyone has the same objectives. Not everyone needs to save for retirement. Some ppl are already in retirement. Some ppl have boat loads of money and just want to maintain..etc etc.

Nasdaq stocks are just getting crushed (ex FB of course). Lots of ugly charts out there. TSLA at some major support. When it goes, it might take down a lot of high flyers as well. Biotech specifically today in the dog house, but also lots of cloud software firms that frankly have little to do with AAPL/Samsung issues. Financials down big since the begininng of the year, and really cheap, IMO. With oil bouncing maybe we are going to get the internal rotation I was looking for a month ago. But have to see IWM acting strong, which it aint

We are in the trenches of earnings season and unlike Q3, no levitation yet. Thats not a good sign. The next few days will be crucial

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Anonymous
admin
January 28, 2016 at 8:45 PM ×

@hipper,

What SA article are you referring to?

@anon 3:48

Thank you for the insightful paper.

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Anonymous
admin
January 28, 2016 at 9:04 PM ×

Wow, that is some cliff-jumping for Amazon.

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Anonymous
admin
January 28, 2016 at 9:26 PM ×

http://www.bloomberg.com/news/videos/2016-01-27/diller-amazon-ceo-bezos-to-be-world-s-richest-person

Great interview with Barry Diller regarding Amazon ... meanwhile, the stock is up almost 9% today.

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Anonymous
admin
January 28, 2016 at 9:32 PM ×

@anon 9:26

And down 13% after hour for now.

I know day-day price change for a single name is not that significant for macro level, but AMZN as a market leader certainly has some implication on traders' minds.

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Anonymous
admin
January 28, 2016 at 9:58 PM ×

@anon 9:32

"...but AMZN as a market leader certainly has some implication on traders' minds."

What would that implication be, you think ...

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Anonymous
admin
January 28, 2016 at 10:32 PM ×

A Bloomberg Alert about a Reuters story on a CNBC report citing Dow Jones... all to say no Saudi 5pc crude cut deal

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Anonymous
admin
January 28, 2016 at 10:39 PM ×

Synchrony Financial SYF massive trade before the close as 50,000 February/Jan. 2017 $28 put calendar spreads opened at $2.50.

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